The purchase of a home is typically the largest investment that a person makes. Because of the amount of money required to purchase a home, most home buyers do not have sufficient assets to purchase a home outright on a cash basis. In addition, buyers who have already purchased a home may wish to refinance their home. Therefore, potential homebuyers consult lenders such as banks, credit unions, mortgage companies, savings and loan institutions, state and local housing finance agencies, and so on, to obtain the funds necessary to purchase or refinance their homes. These lenders offer mortgage products to potential home buyers and, after the borrower applies for a loan, underwrite the borrower's loan application. Underwriting is the process of evaluating a loan application to determine the risk involved for the lender. It often involves an analysis of the borrower's ability and willingness to repay the debt and an appraisal of the value of the property. The lenders who make (originate and fund) mortgage loans directly to home buyers comprise the “primary mortgage market.”
When a mortgage is made in the primary mortgage market, the lender can: (i) hold the loan as an investment in its portfolio, or (ii) sell the loan to investors in the “secondary mortgage market” (e.g., pension funds, insurance companies, securities dealers, financial institutions and various other investors) to replenish its supply of funds. The loan may be sold alone, or in packages of other similar loans, for cash or in exchange for “mortgage backed securities” (MBS) which provide lenders with a liquid asset to hold or sell to the secondary market. By choosing to sell its mortgage loans to the secondary mortgage market for cash, or by selling the mortgage backed securities, lenders get a new supply of funds to make more home mortgage loans, thereby assuring home buyers a continual supply of mortgage credit.
Often, an investor in the secondary mortgage market may use an automated underwriting to determine whether the loan meets the credit risk eligibility and loan product eligibility requirements of the investor based on loan application information provided by the lender. Although the final underwriting decision is made by the lender, the lender (or alternatively a broker) may submit a loan to an automated underwriting engine of the investor prior to closing. In other situations, for example, in the context of bulk loan sales, the loan may be submitted to the automated underwriting engine only after closing. The loan information evaluated by the automated underwriting engine typically includes information relating to borrower-specific risk factors, loan-specific risk factors, and property-specific risk factors. Borrower-specific risk factors may include factors such as the borrower's credit rating or score, as well as other factors such as a borrower's income and financial reserves. Property-specific risk factors may include factors such as the type of property (e.g., manufactured housing, etc.). Loan-specific risk factors may include factors such as the loan-to-value ratio, the loan amount, the loan purpose, and so on. The loan application information is typically collected by the lender or mortgage broker from the borrower and from other sources. To the extent that the loan application information is not correct, this undermines the underwriting process and may result in an inaccurate assessment of the risk involved for the lender and any subsequent investor in the loan.
Underwriting discrepancies may occur for a variety of reasons. For example, a borrower may provide inaccurate information concerning the borrower's income, existing debt, and so on. Likewise, where an appraiser is appraising a home, there may be pressure to overvalue the property in order to achieve a certain loan to value ratio and thereby enhance the borrower's chances of getting approved for a loan (sometimes referred to as “appraisal bias”).
Lenders originate mortgages and are best-situated to ensure that the information collected from the borrower and from other sources is accurate. If a loan is sold in the secondary mortgage market, the contracts governing the transaction often include representations and warranties made by the lender regarding the underwriting that has occurred. If there is a breach of the representations and warranties (e.g., if the loan application information is not accurate or if there are other underwriting discrepancies), the contract may also provide that the lender or other seller may be required to repurchase the loan. The repurchase right thereby serves to protect the purchaser from bearing the risk of deficiencies in the underwriting process carried out by the lender. The circumstances in which the repurchase rights may be exercised are determined by the contractual language governing the sale of the loan from the seller to the purchaser but, generally, if an underwriting discrepancy is found, the seller may be required to repurchase the loan.
Loan repurchase rights are generally exercised when the loan goes into default or is delinquent. For example, upon going into default or delinquency, the loan file may be reviewed by the purchaser and it may be determined that some of the loan application data was incorrect or that the loan application was otherwise incorrectly underwritten, at which point the lender is obligated to repurchase the loan. This creates a need for lenders to manage the repurchase risk that they bear in connection with loans that they have sold into the secondary mortgage market. For example, lenders must retain capital reserves sufficient to enable them to repurchase loans which have their repurchase right exercised by the purchaser.
A need exists for improved methods and systems that provide an accurate measure of the risk in connection with repurchase rights associated with loans. A need also exists for improved methods and systems for managing repurchase risk in connection with loans. It will be appreciated that, although certain features and advantages are described, other embodiments of the invention may be implemented that do not have some or all of these features or advantages, but rather which have other features and advantages.